Soaring $: Headwind for Other Currencies and Treasury?

Gearing Up for a Volatile 2023: Is Market Turbulence the New Normal?

The Surge in Interest Rates and the Fall of Other Currencies Against the US Dollar

2022 was a dismal year full of economic turmoils, with inflation taking center stage as the most alarming concern for individuals, investors, financial institutions, and businesses.

On the business front, the skyrocketing inflation burnt a hole in the pockets of small and midmarket companies across the globe with the disruption of the supply chain, surge in gas prices, and a decline in consumer spending. Alongside inflation, the passive economy in the United States puts companies in a tougher spot.

To fight inflation in the United States, the Federal Reserve aggressively raised interest rates. The rising interest rates essentially led to the spike in the dollar.

According to the International Monetary Fund, the US dollar has soared to its highest level since 2000 by growing 22% against the Yen, 13% to the Euro, and 6% against emerging market currencies. Besides, the Fed isn’t done hiking yet.

Why is this concerning?
Read on to get answers to these questions and get some tips and tricks to be prepared.

Examining the Impact of Dollar’s Strength on Businesses: Everything You Need to Know

How does the US dollar hike spell trouble for a business?

Foreign exchange volatility has surfaced!

Companies need to brace themselves for the onset of the currency war due to the volatility in FX as the value of other currencies has been depreciated by the dollar’s appreciation. 

What’s next? 

This would compound an increase in exchange rate risks. 

Consequently, a company’s operations and profitability will get affected, and the firm will be exposed to these risks:

1. Transaction exposure: Result of sales/purchases denominated in foreign currency.
2. Translation exposure: Result of translating account balances recorded in foreign currencies into the local currency.
3. Economic or operating exposure: Result of the impact of exchange rate changes on long-term competitive dynamics.

Three Areas in Business that will Suffer the Most by Changes in FX

These are the 3 areas in business that are most likely to be affected by the strengthening US Dollar:

1. Trade
   Companies that depend on the United States to export their products might not fare well, as their shares will suffer. Furthermore, foreign investors’ demand for US financial assets might drop, weakening US stocks and bonds. 

Imports, too, would become costlier in local currencies. As a result, companies would need to reduce or halt investments, which can take a toll on their growth as firms would no longer be able to invest in increasing their ROI.

• Demand 
  

  The strength of the dollar is indirectly proportional to the demand. The demand for American goods would be reduced since they would be more expensive in other countries. So, a stronger dollar would lower the demand for US products and services. For instance, the US-based companies that conduct their business around the globe might be affected as the income earned from foreign sales would decrease in value. 

  
  
• Debt and Investment
  A large proportion of companies issue dollar-denominated debt instead of borrowing in their currencies and promise to repay these loans in dollars. This could mean that repayments would get expensive with respect to local currency as a more local currency would be required to convert into dollars when repaying loans. This could amount to losses and defaults.

In addition, a stronger dollar would be more attractive to investors as it would mean a better return. Emerging markets would be impacted as investors would hesitate to invest in them. 

Roadmap for Responding to the Relentless Rise in Dollar

Since treasury is the frontline of a business in financial matters, they should take a hands-on approach in taking preventive measures to mitigate the risks due to foreign exchange volatility. 

But, managing foreign exchange fluctuations is easier said than done due to some bottlenecks. 

To eliminate the challenges above, teams must start by implementing technology and some best practices.

Tech to the Rescue: Cash Flow Forecasting System as your Armor for Managing FX Fluctuations

Want to learn how to ease the management of currency fluctuations amid the US dollar hike? HighRadius Cash Flow Forecasting System provides three benefits to easily manage FX fluctuations.

The Rule of Three to Managing FX Fluctuations Effectively

1. Bid adieu to subpar cash flow visibility
   The cash flow forecasting system enables the automatic extraction and storage of data from disparate sources to provide a consolidated view of all your cash flows.
   

   Automatic data gathering and processing save time in allocating resources toward analysis and eliminates the scope of human errors. It improves data visualization, unlocks real-time cash flow visibility through dashboards, and allows you to drill into the transactional details across each cash flow category, entity, and currency.

   
   
2. Power decisions on accurate cash flow forecasts
   The software supports adding multiple variables and helps choose from various algorithms and models to generate accurate cash flow forecasts. Firms can accurately forecast currency movements and the transactions most vulnerable to FX volatility, such as sales, dividend payments, and capital expenditures.
   

   Besides, the variance analysis feature helps companies compare forecasts vs. actuals, forecasts vs. budget, and forecasts vs. forecasts to understand the current and historical performance of cash flow forecasts and spot the variance drivers to enhance accuracy.

   
   
3. Measure risks with scenario analysis
   The solution supports scenario analysis with the manual override option. This can be incredibly helpful as it can give you clarity into the FX exposures to minimize the impact of currency, commodity, and rising interest rates on balance sheets and income statements. It also helps you predict trends as to how frequently such fluctuations are likely to occur.